Working Paper: CEPR ID: DP3099
Authors: Lans A. Bovenberg; Bas Jacobs
Abstract: We develop a model of human capital formation with endogenous labour supply and heterogeneous agents to explore the optimal level of education subsidies along with the optimal progressive schedule of the labour income tax and optimal capital income taxes. Subsidies on education ensure efficiency in human capital accumulation, while taxes on skilled labour help to redistribute income towards the less able. We thus provide a rationale for the widely observed presence of education subsidies. The actually observed tax codes and level of education subsidies suggest that a large part of education subsidies can be justified on these grounds.
Keywords: education subsidies; human capital; progressive taxation
JEL Codes: H20; H50; I20; J20
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| education subsidies (H52) | human capital accumulation (J24) |
| progressive labor taxes (H31) | redistribution of income towards less able individuals (H23) |
| education subsidies (H52) | efficiency in human capital accumulation (J24) |
| education subsidies (H52) | optimal tax structure (H21) |
| education subsidies (H52) | elimination of positive capital income tax (H24) |